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Vuzix Corp. (VUZI): Let The Caterwauling Begin

by Sonya Colberg, Senior Editor - 5/25/2016 11:08:27 AM

Struggling Vuzix (VUZI) reported losing millions last quarter on revenue that dropped 55% from a year earlier. Yet stock in the video eyewear company quickly returned to absurdly lofty levels - - afloat on paid promotions and a lingering misunderstood story.

TheStreetSweeper believes the 26 cents per share losses might not look too bad compared to what may come next.

Investors may find other viewpoints here. Meanwhile, here are TheStreetSweeper's top eight reasons why all the screaming about this stock will soon turn into caterwauling:

*1. Hype: Paid Stock Promoters

Vuzix stock has fallen into the unfortunate hype-fest category. It has been promoted by at least 21 professional campaigns.

Paid promoter MicroCapResearch pushed out a lengthy Vuzix promotion just last week, on May 17. On Tuesday, May 24, various posts linked to the promo.

At the bottom of the long newsletter promotion, a disclosure shows some generous third party dished out big bucks to promote Vuzix:

Click on the disclaimer/terms of use and investors will find: "Since MicrocapResearch.com may sometimes receive compensation from, and its owners, operators and affiliates may hold stock in, the profiled companies, there is an inherent conflict of interest in MicrocapResearch.com statements and opinions and such statements and opinions cannot be considered independent."

(Source: MicroCapResearch)

Also, out of the goodness of its heart, Star Media paid $15,000 for another recent "investor awareness campaign" hyping Vuzix.

(Source: Stockpromoters.com)

Paid stock promotions like these offer an excellent way to spot a desperate, often troubled company. Stable companies with real products and a real future don't need or want such stock promotions.

Indeed, some of the recent fluff picked up by investors came from the company itself ...

*2. Misunderstood: Hyped Announcement

Vuzix stock shot up after the company announced it was "one of the first developers to have access to the GoPro Developer Program toolkits."

But the rushed market misunderstood the April announcement. A well-crafted press release helped push the rush to judgment.

Investors should just look at GoPro's video, below, that explains the developer program.

The program simply makes it easier for a product, app or device to be used with the GoPro camera. So if Joe Schmoe puts together an app, the developer program makes it easier for him to adapt the app to the camera. That means perhaps thousands of apps, products and devices may eventually be used with a GoPro camera. 

(Source: YouTube, GoPro Developer Program)

GoPro stock dropped about 80 percent this year partially because it hasn't introduced enough new products to keep customers spell-bound .. and buying, buying, buying. So the camera company desperately needed some development ... some excitement.

So if Vuzix wants to try to jump aboard, there's plenty of room alongside numerous companies in GoPro's developer program.

But the market's mistaken, unrealistic expectations have been baked into the Vuzix stock price. The stock has risen so high that there’s really no place it can go now … but down.

*3. Customer Reviews: Smart Glasses Costly, Look Less Than Smart

The Vusix M100 smart glasses cost $999.99. They include display, audio, microphone, android processor, HD camera, and wireless connectivity. But they don't really look smart:

                                                            

                                                                                         (Source: Amazon.com

Also the customer reviews are mixed and hmmm.... the most positive reviews sound like they came right out of a PR person's handbook. Other reviews cut to the chase: "Difficult to use, returned them" and "I feel like I wasted my money on this device."

Recon Instruments sells a similar product for less than half the cost of the Vuzix:

                                                      

                                                                                                  (Source: Amazon)

Amazon lists a nearly countless number - over 265,000 including related products - of smart glass options. One of those, WoSports offers smart sunglasses for little more than the tax would be on the Vuzix model ... just $39.99:

                                                                                         

                                                                                              (Source: Amazon)         

*4. Vuzix: Difficulties Competing

Sometimes it seems Vuzix is trying to sell a black-and-white TV in a world that demands this-minute technology.

Yet Vuzix products, including the upcoming M300, are going up against top-notch, multi-billion dollar companies with immense resources in research, development, marketing and creativity, including:

*Apple (AAPL, 10.73 P/E; $53 billion net income)

*Google (Alphabet, GOOG, 28 P/E; $78 billion revenue)

*Nokia (NOK)

*Sony Ericsson Mobile Communications (SNE)

*Qualcomm (QCOM)

*Samsung Electronics Co. (S SUN.DE)

*5. Analysts: Lower Vuzix’ Forecast

Only two analysts bother covering Vuzix. Worse yet, both of those have lowered Vuzix' earning forecast ... in the past week.

Analysts are now predicting that earnings losses will hit $-0.82. That's an 11 cent-per-share decline, which represents a stunning change in attitude toward Vuzix.

                                    

                                                                                      (Source: Nasdaq)

That anticipated drop is particularly worrisome for current shareholders because ....

*6. Analysts Have Previously Overestimated Vuzix

Analysts have previously expected better performance from Vuzix. But Vuzix rewarded them with some ugly earnings surprises.

                                      

                                                             (Source: Thomson Reuters)

If history holds true, then, Vuzix shareholders could see worse earnings losses than even most analysts predict ... perhaps exceeding a $1 loss for the year.

*7. Vuzix: Financial Reports Are Unreliable

The company SEC filings warn: "disclosure controls and procedures and internal controls over financial reporting were ineffective as of December 31, 2015 and 2014 which could result in material misstatements in our financial statements."

The company disclosed the problem in December and planned to work on it. But by the end of March, Vuzix management still hadn't gotten control. So the material weakness remains (page 22 ):

"... we cannot assert that the control deficiencies relating to the reported material weakness have been effectively remediated."

There's so much uproar, the company can't even get its own address - in West (not Wet) Henrietta - correct on its SEC filings:

(Source: Company 10-Q SEC filing)

Bottom line: Vuzix folks are so overwhelmed - and the financial condition is so poor - that they can't get their financial reports in order.

So, as bad as the financial reports are, they could actually be worse:

(Source: Company SEC filling)

Yet this market is valuing the company at nearly $93 million!

And the company has richly rewarded its executives for those paltry financials.

The total combined 2015 compensation for its two top executives, CEO Paul Travers and CFO Grant Russell, hit $1.7 million.

(Source: Company SEC filing)

*8. Looming: Dilutive Stock Offering?

The company operations burn through about $3.2 million per quarter. Available cash and equivalents in March were $8.2 million. So, now two months later, cash has probably fallen to around $6 million. So logically, if Vuzix wants to progress, it will need to raise money by late Fall.

In fact, the recent 10-Q warns: "The Company will need to grow its business significantly to become profitable and self-sustaining on a cash flow basis or it will be required to raise new capital."

With the stock price so high, we believe the company will probably want to issue a stock offering soon. If so, existing stockholders will have to watch out for substantial dilution.

*Conclusion

So here's a big question: Should shareholders invest ~$6 per share - 40 times sales - for a struggling company that:

(1) Is hyped by paid promoters;

(2) Its largely insignificant but misunderstood announcement is baked into the high stock price;

(3) Sells expensive, largely undifferentiated products in a massively competitive environment;

(4) Offers such poor prospects that analysts recently lowered this year's earnings expectations to negative $-0.82;

(5) Is burning through millions quarterly and could soon pull a potentially dilutive stock offering;

(6) Reports lower sales, $61 million in accumulated losses and material weaknesses;

... yet its top two executives had the nerve to collect $1.7 million in compensation last year?

We said there'd be caterwauling. And there will be. But all the caterwauling will come from Vuzix as smart shareholders - now armed with the facts - stomp out the door and plow their investment dollars into a better company.

Consequently, we expect the stock to get chopped in half in the very near term.

 

* Important Disclosure: The owners of TheStreetSweeper hold a short position in VUZI and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

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